For many years investors were obliged to use their personal pension funds (net of any tax-free lump sums) to buy an annuity. An annuity is an insurance company contract which pays a guaranteed income for life.
In 1995 new legislation was introduced which meant that you could draw a restricted level of income directly from your personal pension fund (“income drawdown”) until the age of 75 when you had to annuitise. In 2006 the requirement to buy an annuity was done away with altogether.
Modern “pension freedoms” mean that there are now no restrictions on the amount of income that may be drawn from a personal pension fund using income drawdown. So is there any place at all for pension annuities in the modern world?
Well, yes – for some people. Firstly there are still many older pension plans out there which offer Guaranteed Annuity Rates (GARs). These rates were written into the policies (mostly back in the 1980’s) and often stand at twice the open-market rates available today. It would be a very brave (or foolish?) investor who would turn his back on these in the current low-growth economy.
Then there are those investors who are simply not comfortable with, or who cannot afford, ongoing investment risk in retirement. Even though annuities currently offer very low returns they are nonetheless guaranteed throughout life. This will be the key issue for some individuals.
Prospective annuitants who are not fortunate enough to have GARs on their policy should be sure to shop around for the best deal as rates vary considerably from provider to provider. Never just accept the terms offered by your pension provider as these may be well below the best open market rates.
Great care is also needed in deciding on the type of annuity to buy. Do you want to allow for future inflation? What about a spouse’s benefit? Should you include a “Guarantee” period? These are all decisions which must be made when the annuity is bought and they cannot be changed at a later date.
HDA have many years’ experience in the annuity market. For further information or advice please get in touch.